Monetary Incest

- Last Friday, around three
o'clock in the afternoon, something snapped in my brain, and
the last thing I remember was when I saw that the national debt
exploded upward by $60 billion dollars. In one day! Then next
thing I know, I am lying on the floor and staring up at the ceiling,
wondering how in the hell I got here.

It was several hours and a
pepperoni pizza later before I finally, and grudgingly, returned
to my usual reality of being another face-in-the-crowd frightened
paranoid lunatic, driven berserk by the insane monetary policy
and the mutant brand of ridiculous economic theory that we are
operating under. Then, just as I was putting my shattered life
back together, I see that the banks, last week, gobbled up $53
billion in government debt! This was after these same banks SOLD
$74 billion last week! My breath started coming in ragged gasps,
and next thing I know, I am lying on the floor and staring up
at the ceiling, wondering how in the hell I got here.

Of course, my suspicious and
distrustful Mogambo nature (SADMN) immediately jumps to the conclusion
that the government now creates debt and the banks create the
money to buy the debt, which is akin to brothers and sisters
marrying and having lots of kids, who marry each other and have
lots of kids, who marry each other and have lots of kids. You
end up with lots of kids, but not the kind you normally want,
with the emphasis on "normal." Ditto with economies,
if you catch my drift here.

So, staggering unsteadily to
my feet, my eyes happened to focus long enough for me to read
the statistic that the new Gross Domestic Product Deflator had
been revised upward to 2.9%. I could feel my guts churning. The
next thing I knew, I had this weird, swirling feeling of overwhelming
déjà vu as I was lying on the floor and staring
up at the ceiling, wondering how in the hell I got here.

This Gross Domestic Product
Deflator thing, in case you were wondering, is the inflation
gauge that they use to reduce the dollar value of raw GDP, which
is, roughly, just the total dollar amount of sales and exchanges
in the economy. But since the dollars that are spent have been
continuously devalued in buying power, the prices paid have gone
up. So, obviously you can't have a growing economy if last year
you sold ten widgets at a buck apiece, and this year you still
sell the same ten widgets, but at two bucks apiece. If you look
only at income, it looks like the economy grew 100%! Wow! But
I am sure that you noticed, with your penetrating and insightful
glare, that the economy still only made ten lousy widgets, so
actually the economy, in terms of output, had zero growth. So,
you have to reduce those dollar-sales by the amount of dollar
depreciation to get "real" (inflation-adjusted) GDP,
as measured in constant units of buying power. That reduction
is now about 3%.

And since the horrid Boskin
Commission (the guys who came up with all those slimy trickster
ways to let the government make inflation seem to disappear)
was charged with the task of literally erasing about 1.5% of
inflation out of the statistics, to get a glimpse of reality
all we have to do is add back that 1.5% to the "official"
deflator, and now we see that inflation is actually running at
4.5%!

And now, to show you that something
very, very weird is going on, let's take a look at interest rates
in the face of this inflation. Short rates are up a little, but
long rates are not. In fact, almost all interest rates are actually
below the rate of inflation! Damn near every interest-bearing
asset, the world over, regardless of maturity, is priced so high
that it yields less than the real, unadjusted rate of inflation!
This is insane! This is beyond insane! This is out there, past
the fringes, where not even The Mogambo will go, even when over-medicated
to semi-consciousness!

The yield curve is almost flat,
so I figure, and this is where I reveal my ugly, suspicious and
utterly distrustful character, that this is caused by the guys
who laid on all of those derivatives when the curve was steep,
who are now so far underwater that it is threatening to implode
the whole scheme. So what to do? Easy! Loan them more money to
put on some spreads that bet that the curve will continue to
flatten! And use the government to take the stupid, losing end
of the trade!

I see hands go up, and being
The Mogambo, I can read their minds, and the result is that about
80% of them are lost in pornographic daydreams, and the other
20% are wondering either "What in the hell is that jerk
talking about?" or "Did I just pee in my pants?"

"But," I say, "as
an offset, as the yield curve steepens, their existing steep-curve
derivatives would be back in the money! And they can pay the
losses of the narrow-spread derivatives! Everybody wins!"
And to illustrate my point, I jump atop my desk and belt out
a powerful rendition of "We're In The Money," where
I use this really neat Al Jolson-like voice on the line "We
got a lot of what it takes to get along"!

- According to HalfPastHuman.com,
the sun is putting out all kind of storms of energy and particles,
and oceans of them are washing over the earth. The interesting
part, for me, is when they pondered the significance of so much
energy being absorbed by the earth, especially along the lines
of the famous equation E=mc2, which would seem to dictate that
our mass (m) could be increasing as a result of the input of
new energy (E). Not much, perhaps, as the total energy input
would be divided by the square of the speed of light, but some.
Perhaps a lot.

And even if the energy is not
converted to mass, the sheer amount of cosmic energy coming into
the earth must have some damn effect! I mean, if my wife hurls
a frying pan at me, I know she is going to miss me because I
am ducking and weaving and taunting her ("Nyah nyah! Missed
me again, ya old bag!") But the lamp, the wall and the floor
are not so fortunate. So we have proved that large amounts of
energy coming into the system WILL have an effect, even if only
on the furnishings and bric-a-brac.

And this may explain why, sort
of suddenly, there is all kinds of increased/weird atmospheric
and geologic activity. Not to mention all the other kinds of
behavioral weirdness that seem, suddenly, increased here lately.

- Walter J. John Williams is
a guy who has looked at federal spending from an actuarial viewpoint,
which means not only looking at cash-flow today, but the future
impact of it all, "using generally accepted accounting principles
(GAAP)." He adds that "a large portion of the expanded
deficit is from the annual increase in the net present value
of unfunded Social Security and Medicare obligations."

So how bad is it? He says "The
U.S. government's fiscal ills have spun wildly out of control
and no longer are containable within the existing system. The
actual annual shortfall in U.S. government operations for fiscal
year 2003 was $3.7 trillion. Put in perspective, that means if
the U.S. Treasury had seized all wages and salaries in 2003 with
a 100% income tax, there still would have been a deficit! The
outlook for fiscal 2004 numbers is even worse." And to spare
us further horror, he does not even mention that 2005 is going
to be even worse! And then people wonder why I am so weird! But
to use a line from Randy Newman's terrific theme song of the
TV series "Monk," "People think I'm crazy for
worrying like I do. If you paid attention, you'd be worried,
too!"

But just this tiny smidgen
of information should be enough to make you think to yourself,
"The Mogambo was right! The government is a lying bunch
of idiots that are destroying our economy!" As if to prove
me right, he goes on to provide proof, and he says the "popularly
reported 2003 budget deficit was $374 billion, one-tenth the
number cited above." One-tenth! The government is admitting
only one-tenth of the destruction that it is causing our economic
system!

He figures that the true fiscal
deficit for 2004 will be prove to be near $4.3 trillion, meaning
that the deficit for 2005 ought to be about $5 trillion, which
means that in three short years, the buttheads that we elected
to Congress have not only spent everything they could get their
hands on, but have increased our accrued debt by more than the
entire GDP of the country! Everything we, as a nation, produce
in goods and services, in a whole year! And this gigantic sum
is just the ADDITION to the accrued national debt! And it is
getting worse every freaking day!

Seeing that I am sitting here
with this stupid look on my face, which he thinks means that
I am totally clueless, and he looks at me in disgust. In truth,
I am only partially clueless, and the tiny little piece of The
Mogambo that is NOT clueless is stunned, and I look like this
when I am stunned. Speaking as if he is talking to some slow-witted
four-year old, or a Congressperson, he says, with that undertone
of pity and contempt that these are "negative extremes never
before breached outside the environment of third-world, net-debtor
nations, jerk." Well, he didn't actually finish up by calling
me a jerk, but you could tell that is what he wanted to say,
so I added that part to show you how everybody hates me, and
how they are all out to get me.

So what to do? If you listen
to that idiot Mogambo, there is nothing to do, as there are no
solutions, and that is why it is imperative that you not get
yourself into this kind of stupid mess in the first place. But
Mr. Williams is not so negative, or scary, or angry, or as heavily-armed.
He says "The unfolding fiscal disaster faces one of only
two very unpleasant general solutions. The first solution is
draconian spending cuts, particularly in Social Security and
Medicare, even if accompanied by massive tax increases. This
appears to be a political impossibility, at present.

"In the absence of political
action, the second solution is the U.S. government facing some
form of insolvency within the next decade or so. Shy of Uncle
Sam defaulting on debt, the most likely outcome is the Fed eventually
having to monetize U.S. debt heavily, triggering a hyperinflation.
U.S. obligations eventually would be paid off in a significantly
debased and devalued dollar. "

This brings up the point the
dollar has grown so strong here lately that it is the highest
it has been in over a year! See? I told you things are weird!

- Ned
Schmidt has calculated that since about 1990, "the U.S.
international net worth has been negative, and is currently just
shy of negative $3 trillion. Interestingly, that period of negative
net worth for the nation seems to coincide with the reign of
Greenspan at the Federal Reserve. Federal Reserve policies seem
to be the most likely influences that destroyed the equity of
the U.S."

Even Bill Bonner of the Daily
Reckoning, who is a real calm and intelligent guy, which are
just two of the things that I am not (and by a long shot), has
pondered this very thing, and thoughtfully muses, "How we
would love to read the history books 100 years from now! What
will they make of our strange Pax Dollarium with all its bizarre
illusions and silly conceits? At the current rate, the United
States squanders its national wealth at the rate of more than
6% of GDP and approximately 1% of its total balance sheet annually."

And this brings us, as you
knew that it would eventually, and I can almost hear you groaning
and whining "He's not going to start up about gold again, is he?" and I reply "Yes! Yes
I am!" In a stage performance worthy of an Oscar, which
I will not get again this year because of political intrigues,
I stretch out my mighty Mogambo arm (MMA) as if summoning the
thunder of Zeus from atop Mount Olympus, and with a stentorian
bellow, I, ummm, bellow, "gold! gold, infidels! O, ye who worship at the altars of
paper money and fractional banking, on your knees to gold! If not today, thanking gold
for being there to save your nasty, stupid butts, then soon enough
you will be on your knees, begging gold
to at least save your children's nasty butts!"

And I say this, with all the
beaming confidence that a guy who has no idea what he is talking
about can muster, that gold will
prosper against a paper, fiat currency because it always has
and always will. And a fractional banking system does nothing
but make it all a lot more so.

As a proof, I offer Prof. Werner
Antweiler, of the University of British Columbia, who has calculated
the comparative daily exchange rates of the Japanese yen, European
euro, British pound, Canadian dollar, and the US dollar, all
relative to gold. The result? I though you would never
ask! They are all losing ground compared to gold!
And what do these currencies have in common? They are all paper,
fiat currencies! And everybody who uses those currencies would
have made money buying gold! Hahahaha!
See? I told you what would happen! And sure enough, it did!

And you don't have to take
my word for it, or believe your own lying eyes. On the TocquevilleFunds.com
site, they write "The dollar price of gold
bullion is trading within 3% of a seventeen-year high, despite
negative sentiment. Over the past five years, the dollar gold price has increased 50% vs. a 16% decline in
the S&P 500 and a 18% decline for the trade weighted dollar."

Ned Schmidt has gone even further,
to show you that he doesn't sit around all day goofing off and
making prank calls to the Federal Reserve ("Hello? Federal
Reserve? Alan Greenspan is a big butthead! Hahahaha!"),
has calculated that other fiat currencies have suffered the same
fate, too, and some of these countries are Australia, Mexico,
South Africa and Switzerland. Inescapable conclusion, which is
immediately comprehensible even to a pitiful moron like me? So
I raise my hand and wave it excitedly, wanting him to call on
me to supply the answer. But Mr. Schmidt acts like he doesn't
even see me, and says, "What this ddtells us is that investors
have been moving away from fiat monies, all of them."

Then, to lighten things up,
he adds a little joke, and says that in one sense the USA has
a negative book value. Then he asks, "By the way, how many
of you would buy a stock that has a negative book value?"
which I suppose would probably be real funny, except that all
I do is shudder and wonder if I am sufficiently heavily-armed,
because when things start reverting to their real value, there
are going to be a lot of angry, scared, desperate people. And
of all the things I fear, I dread mobs of angry, scared and desperate
people, because I have seen a lot of movies, and in the ones
that have mobs of these kinds of people, they behave very badly,
and usually of a distinctly homicidal nature.

As an aside, apparently there
are a lot of other people who watch old movies, as the sales
of guns are shooting up, if you'll pardon the pun. Smith &
Wesson Corp. said "firearms sales for fiscal 2005 are expected
to increase by approximately 11 percent over fiscal 2004 levels."

- An interesting nugget from
Marshall Auerback on the PrudentBear.com site says
that, "Over the next fifteen years, to improve living standards,
the authorities plan to move three hundred million workers from
rural areas where they earn just over one dollar a day, into
the towns and cities where they could earn four and a half dollars
a day." This means that this is the exact equivalent of
the whole population of the USA gradually getting a 450% increase
in their incomes. This comes to 10.5% a year! A group the size
of the United States is going to get annual 10.5% raises? Wow!
Wow de wow wow!

As a point of discussion, what
would you say would be the result of wages and salaries increasing
by 10.5% a year, for fifteen years, in the USA? And can you equate
that with the effect on inflation? Hahahaha! Me, too! We're freaking
doomed!

And this is not something new,
either, as Mark Faber tells us that "per capita incomes
in China have doubled every 10-12 years for the last 25 years."
No wonder they are growing so fast!

- Alert reader Jack W is one
of those guys who sent along the perfect word to describe the
how the American political system, as do all systems, has evolved.
Kak·is·toc·ra·cy, which is a noun
that means "Government by the least qualified or
most unprincipled citizens." Hahahahha! See? I told you
it was perfect!

- And it is not only us, that
is being mismanaged into the ground. The Canadian Taxpayers Federation
reports that Tax Freedom Day in Canada fell on June 26th this
year, as calculated by the Vancouver-based Fraser Institute.
They explain that Tax Freedom day "is the day you stop working
for government and start working for yourself. Prior to June
26th the equivalent of all your income went to pay taxes to the
three levels of government."

This year it occurs one day
later than in did last year, "and fully 12 days later than
it did in 1995!" They attribute it to the growing number
and level of taxes that they have to pay.

In short, Canadians "worked
103.5-days to pay the federal government, another 64 days to
feed the provincial government, and a final 9.5 days to satisfy
City Hall. Total: 177 days, fully 48% of our incomes!" Forty-eight
percent of income! And before you get all weepy-eyed about the
poor Canadians, I remind you that we pay, to local, state and
federal governments, roughly that much here in the USA!

- Martin Weiss of the Safe
Money Report says that "the 'household debt service ratio,'
which how much of the average household's disposable personal
income goes toward debt payments on everything from mortgage
to consumer debt. In the first quarter, it hit 13.4 cents per
dollar -- the most ever."

This seems bad enough, but
he goes on to say "And that's just an average! If you factor
out the wealthiest families, you'll find that typical homeowners
are spending 40%, 50% ... even 60% of their incomes on their
house payments alone -- to say nothing of their other debts."
Which are also so big that they have set a new world record!

- It looks like things are
going to get rough in Mexico, as explained by Roland Watson in
his essay, "Mexico: the State, Oil and silver" on 321energy.com. He says that
untoward things are happening at the huge Cantarell oil field.
"Since the field came online in 1979," he writes "reservoir
pressure has continually dropped as production extracted more
and more oil. The crunch came in 1999 when production began to
decline and massive injections of nitrogen gas were employed
to stabilise reservoir pressure. At 1.2 billion cubic feet of
compressed nitrogen per day, nearly half of global nitrogen production
was used on the Cantarell field." Wow! Now that's an interesting
fact I never heard of! Half the global production of nitrogen
is being pumped into the ground in Mexico! "Mexico joins
the growing list of countries in oil production decline. So with
liabilities of $88 billion dollars (four times that of Exxon)
and an annual investment requirement of $10 billion just to maintain
current production levels, Pemex is on the verge of bankruptcy."
Uh-oh.

- The outrage over the Supreme
Court's Kelo v City of New London decision to allow a city to
force a homeowner to sell his house to a developer has occasioned
today's installment of positively poetic justice (PPJ). To wit,
a group of investors has petitioned to have the house of Supreme
Court Justice David H. Souter turned over to them to construct
a hotel, which they plan to call "The Lost Liberty Hotel."
It will also feature a "Just Desserts Café"
and a museum "featuring a permanent exhibit on the loss
of freedom in America." I love it!

- Christopher Farrell, writing
the essay
"Greenspan: Wizard or Villain?" on msnbc.com, divides
people into two camps. On the one side, we have what he calls
"The hairshirts," who "believe that for the health
of the economy to be restored, the inevitable bust that follows
a boom must be at least as great as the boom." Apparently
we, speaking for the hairshirts everywhere, are the stupid scumbags
of the world. On the other hand, we have what he calls "Growth
proponents - and there's none greater than Greenspan - believe
that it's better to limit the fallout of a bust and get the economy
growing again as quickly as possible." Did you note that
one side is dismissed as the pejoratively-labeled "hairshirt"
idiots, and the other side is gloriously called "growth
proponents" instead "raving lunatics"?

So it is better to let my daughter
speed dangerously in her car and clean up the mess when she inevitably
crashes, rather than stop her from speeding? And it helps the
economy for me to constantly put bigger and bigger engines in
her car the whole time? Wow! No wonder I always win the "World's
Worst Dad" award!

Then to make sure that you
understand that he is a "journalist" and not an economist,
he goes on to say, "To the hairshirts' way of thinking,
the great mistake Greenspan made was not allowing for a vicious
economic and financial downturn to purge the speculative excesses
built up during the heady '90s." No, you little jackass
twerp! That is not it at all! The great mistake, and you might
want to write this down since it is the whole crux of the matter,
was allowing the damned speculative excesses in the first damned
place! But nooOOoooo! Greenspan is directly responsible for the
creation of so much, so excessively much, so incomprehensibly
much, so impossibly much money and credit, which financed every
damn one of the damn speculative excesses, which now need to
be purged, because there is nothing else to be done with them,
and with all of the attendant misery.

So we are NOT quibbling about
how best to correct huge boneheaded and criminally-stupid mistakes
with monetary policy. What we should be quibbling about is where
in the hell YOU were, you and your rapier-like journalistic wit
and vast economic-savvy, the entire time this Greenspan putz
was doing this monetary insanity? And now we are supposed to
think that this Greenspan fool, who caused our misery, is the
best person to correct the mistakes he himself made? Hahahahaha!
Journalists! Hahahahaha!

To prove that Alan Greenspan
is a real first-class bonehead, Richard Schlessel sent me this
snippet of an interview, where Alan Greenspan was asked, "Do
you believe that personal retirement accounts can help us achieve
solvency for the system and make those future retiree benefits
more secure?"

Greenspan is reported to have
said "Well, I wouldn't say that the pay-as-you-go benefits
are insecure, in the sense that there's nothing to prevent the
federal government from creating as much money as it wants and
paying it to somebody." This is exactly right, they are
secure Although he leaves it to the reader to extrapolate to
the correct conclusion that the money that the government will
print with such insouciance will be, as a result, worthless,
as far as using it to buy things is concerned.

But then he goes immediately
to a non sequitur when he says, "The question is, how do
you set up a system which assures that the real assets are created
which those benefits are employed to purchase?" What in
the hell is THAT supposed to mean? Is he asking, "How do
you keep inflation from destroying everything when all that money,
that staggering, gigantic towering mountain of money, flow into
the economy?" Is he saying that he wants to somehow direct
all of that money into the stock market and the bond market and
the housing market? What? What is he saying?

Mark Faber of the Gloom, Boom
And Doom Report is another guy who also believes that the Federal
Reserve is incapable of dictating where money goes. He writes
that the Fed creates money like water, and "when there is
a problem they just replenish the water level of this fountain,
or of this lake, and then it overflows. And whereas the Fed controls
the quantity of money that comes into the system - more or less, they don't control it 100%, but
more or less - what they certainly don't control
is where water, or the money, then flows to. It can flow, as
I mention, in the 60s into wages, in the 70s into commodities,
and consumer prices in the 80s, notably into Japanese stocks
and real estate, and then in the 1990s into the Nasdaq, and now
more recently into the real estate market."

That is bad enough, but even
worse is that it is, as he says, "uncontrolled - and if
the door is open, or the system, then the money can one day also
flow out of that door, which leads to weakening currency."

Jim Puplava, seeing Mr. Faber
and me yammering back and forth and getting all the attention,
says that he agrees, too. "When central banks stimulate,
or print money - it stimulates something: sometimes
production; sometimes employment; sometimes assets." The
worse part is that "it annihilates thrift; it destroys,
in my opinion, moral and intellectual values; it creates the
wealth disparity."

Mr. Farrell then writes, "The
critics say Greenspan has transformed the economy into a giant
bubble, concocting one even greater than the one that already
burst. The longer he delays the day of reckoning, the worse the
fallout will be when the bubble pops." Yes, that is EXACTLY
what I say, and that is exactly what history proces, and that
is what everybody who knows the least bit about economics says.

But Mr. Farrell is not interested
in any of that. In fact, he dismissed me with a wave of his hand,
as if shooing away a perky fly, as he goes on to say "That's
a severe indictment - but not necessarily a valid one. A problem
with the anti-Greenspan mindset is that hairshirt economics was
largely discredited during the Great Depression." Huh? It
was? Excitedly, I pull my chair up closer, because this is big
news to me! I am on the edge of my seat to hear how this was
"discredited during the Great Depression"!

Seeing that I am at full attention,
ready to hang on his every word to soak up this important new
knowledge like a sponge, he says "Mainstream economists
of all schools, from Keynesianism to monetarism, turned away
from hairshirt economics after the Great Depression." Huh?
Another new revelation! I never heard that before, either! Sensing
my stupefaction at the enormity of what he is saying, he explains
"They realized that the government could play a positive
role in counteracting contractionary forces in the economy."
Hahahahaha! I laugh in contempt at such a statement!

Wiping the tears of laughter
from my eyes, it is difficult for me to stop laughing, because
everyone, in all periods of history, all know from the cradle
to the grave that the government can cause a boom! This is because
history is essentially one long, tiresome lesson in how all governments
did this very thing, at one time or another, and the economy
always got the boom, and then they all paid a heavy, heavy price,
sometimes literally destroying the economy. And then every government,
facing the inevitable economic contraction, then went after more
money, usually by declaring a war, so that they could, as he
says, "play a positive role in counteracting contractionary
forces in the economy." And yet this Farrell guy thinks
that only after the Great Depression, not even eighty years ago,
(which was caused by the newly-formed Federal Reserve acting
like profligate jackasses even then, creating huge amounts of
money and credit to counteract, supposedly, the recessionary
slowdown following WWI, and thus financed the Roaring Twenties),
did people realize, and pardon me from laughing out loud, but
I can't seem to help myself, that deficit-spending by a government
could counteract "contractionary forces"? Hahahaha!
I can't help myself! Hahahaha!

But, to be fair, Mr. Farrell
is, after all, just a journalist. And we have learned that nobody
requires journalists to know what in the hell they are writing
about, but only that they write something to fill up empty pages.

But this is not a valid excuse
for the esteemed Economist magazine, and they need one, as you
will discover when you read the Economic Focus page, entitled
this week as "Beware the Bubbles." First they describe
how massive imports of low-cost Chinese goods kept the American
consumer's "market basket" from going up in price,
thus preventing inflation in those goods, as "Deregulation,
new technology and the integration of China into the global economy
have also reduced the prices of many goods, making it easier
to keep inflation low." Wow! Let me see if I have this straight,
since being a real stupid guy makes it so hard for me to understand
these difficult concepts; China made stuff and sold it to us
cheap, and this kept some prices down, and thus inflation, as
measured by the movement of prices, was extraordinarily low.
So now we turn right around and say that the central banks kept
prices down and inflation low? By doing what, you morons?

But then without even pausing
for breath, they launch into how the Bank for International Settlements
(popularly know by its acronym, BIS), is growing concerned "about
a different kind of risk: the rapid growth in debt and asset
prices. Ironically, this is partly due to the central banks'
success in defeating inflation." Hahahaha! What a bunch
of morons! After explaining how a lack of consumer-price inflation
was due to China and other low-cost producers coming on-stream,
the Federal Reserve is given credit for it!

Hahahahaha! Pardon me while
I double over in laughter at the thought! Hahahaha! Notice how
I am already grinning from ear to ear, on the verge of busting
out laughing like some demented hyena-like creature, only with
more drooling and snarling, at that punch line. And the punch
line is that the central banks have had "success" in
defeating inflation! Hahahaha! Snarl! Drool! Snarl! The damned
central banks have been creating inflation with both hands years
and years, and the only things that have NOT shown price-inflation
is because of the consumer items made by the Chinese? And yet
this is some kind of weird proof of "the central banks'
success in defeating inflation"? Hahahaha! This is the Economist
magazine, so you have MORE proof that things are getting really,
really, really weird!

Anyway, the BIS apparently
recommends, according to this article, that we immediately raise
interest rates "even if inflation remains tame." And
if inflation does NOT "remain tame?" Hahahaha!

- Senators Lindsey Graham and
Charles Schumer have been convinced by Alan Greenspan and John
Snow to drop their idea of levying punitive tariffs on Chinese
imports, designed to force China to release the peg of the Chinese
yuan to the dollar. The idea, and you are going to love this,
is that our exports would become relatively cheap, although we
Americans would not notice any difference in the prices we pay.
But with this price differential, people in other countries would
be unable to resist a bargain, and so we would sell more American-made
stuff to them, and the American economy would again grow strong
and we would again strut around the world, thumping our chests
in pride and crowing about "the American way" and killing
anybody who disagreed with us.

But the plans for the tariff
are on hold (insert exciting video footage of a hand flipping
a switch to "off") because the Senators have been told
by these Federal Reserve and Treasury Department worthies that
the have some secret, inside poop that the Chinese will revalue
their currency within the next couple of months. Guaranteed.
This is news to everyone else, I am sure.

Especially those foreign guys
who have long-term contracts specifying that they be paid in
dollars, and who must have soiled their pants when they heard
that, like I almost did, but I never smelled anything, and I
didn't want to look. So no harm, no foul.

But this re-pegging this is
nothing but bad news. If the Chinese re-peg the yuan against
the dollar, thus devaluing the dollar, then if oil (which is
priced in dollars) does not change in price, then oil will become
instantly that much cheaper for the Chinese. They will, I assume,
buy more at the lower price, driving up demand. But supply, which
is already being pumped at the extreme limits that the production
/ shipping / refining system will allow, will not increase. Therefore,
oil will go up in dollars, thanks to the demand /supply imbalance,
as dictated by Economics 101.

Even worse, the oil producing
nations will soon get very, very tired of accepting dollars that
are losing value, and will either 1) suffer the loss, which I
don't expect, 2) raise the dollar price of oil, or 3) start asking
to be paid in some other currency that is NOT losing value. That
means that the price of oil, in dollars, will go up some MORE!
Yow! As we near Peak Oil (half of the world's recoverable supply
is gone) and its increasing crimping of supply, plus a dollar
that is losing value, the price of oil will thus continue, for
the rest of the life of the silly paper US dollar, go up and
up.

And not only that, but American
products like food will be cheaper to the Chinese, so they will
buy more, which will allow American producers to charge more,
which makes prices go up, which even we Americans will have to
pay, and this is the whole ugly side of price inflation. Damn!
It's like I've been saying all this time; there IS no way out
of this stupid mess caused by the Federal Reserve.

- Bill Gross of PIMCO,
the big bond fund behemoth, predicts that the Federal Reserve
will lower interest rates by this December, sixth months from
now. The economy will be slow slow slow, with money being lost
at such a clip that the Fed will be forced into creating more
money and credit and lowering interest rates to entice people
to borrow and spend and go farther and farther into un-payable
debt. This could very well be our fate.
This is, of course, the Japanese fate, who also famously created
too much money and credit and have suffered for their profound
error for fifteen freaking years in a row, and it may be our
fate for fifteen years or more, probably more.

But you will never hear of
anything that ever even hints that anything is wrong with the
economy. One reason is all comes down to the famous, (or infamous,
depending on your perspective) line of crap from that commie-bastard
FDR, namely "We have nothing to fear but fear itself."
Wrong, bozo! Even in the best of times, there is plenty to fear.
And in the worst of times there is much, much more to fear.

- There have
been increasing howls about the cost of the Iraq war. Relax.
All that money is going to somebody, and then it goes to the
employees and owners, and to the suppliers, and then to THEIR
employees, owners and suppliers, then somebody else, and, on
and on and on, until eventually it filters down to you and me,
you by earning it through hard work and long hours, and me getting
it from complete strangers if I promise to just go away, usually
with the proviso that God's sake I will shut up about how Federal
Reserve monetary policy is destroying our money, and how we are
going to be destroyed, and I always figure, "Sure! Why not?
A buck's a buck!"

- Some bad news in China is
that their stock market is at an 8-year low. The cumulative fall
is, so they say, greater than the fall of NASDAQ. No wonder that
their government is, like ours, desperate to get them back up.

- An interesting follow up
to last week's blurb about the Banister case and the income tax.
It turns out that he was actually acquitted only of conspiracy,
and it has nothing to do with the income tax itself. The more
interesting part is that, although there is some confusion as
to whether the Sixteenth Amendment (authorizing an income tax)
was ever actually ratified or not, it doesn't matter. A subsequent
Supreme Court ruled that an income tax was already allowed by
the Constitution, because it was, according to these Supreme
Court guys, an indirect tax, as opposed to a direct tax. The
distinction being something about how one is levied to the states
in some disproportionate degree, according to a tax/population
ratio, I suppose, or something, and the other is not, or something.

The result? Banister was acquitted
of conspiracy because he was not conspiring to do anything illegal.
The guy who did not pay his taxes, based upon the theory, went,
predictably, to jail for not paying his taxes. A sad tale ends
even sadder.

- A new wrinkle in the credit
fabric has appeared, in that I was called on the phone about
a new program for Discover cardholders. For the sum of, as I
recall, eighty-five cents per month per hundred dollar's of credit
balance, you can enroll in their little program that will allow
you to freeze your account for up to two years. During that time,
you can't buy more stuff in this "frozen" account,
of course, but you don't have to make any payments, nor will
they charge you any interest on the balance.

The kicker, as I discovered
when I asked some further questions of the girl on the phone
(e.g. "Can I borrow your shoes?" and she says, playing
the coy little temptress that she was, "Ewww! Ick!"),
is that as soon as you choose to start paying off that frozen
account, (or, presumably, at the end of two years when you are
REQUIRED to start paying off the account), interest again starts
being charged against your balance! And at an interest rate that
will be determined at that time, and they don't want to make
a guess about how high the interest rate would be, as THAT is
certainly not frozen! So for paying a monthly fee of 0.85% of
the total amount you owe, a fee that compounds to over 10% a
year (alarm bells should be ringing in your head, going "ding
ding ding ding!"), you get to stop buying stuff and stop
paying for stuff! Hahahaha!

- Dan Denning of Strategic
Investment makes the astounding prediction that "China's
Communist government will collapse within 10 years." He
thinks that this is inevitable since "when you unleash the
powerful human desire to be rich, the desire to be free is not
far behind', which is probably true. But according to the Mogambo
dim view of things (MDVOT), I figure that governments always
want more money than they can reasonably get, and sooner or later
they go after the rich guys to get more money out of them, and
THAT is why the urge to be free follows the urge to be rich.
Oddly enough, the best idea is to first be free, and that freedom
produces the riches, prosperity and wealth as Adam Smith's "invisible
hand" of free enterprise performs its magic.

But no matter what follows
what, it is working in China, as we conclude from Marc Faber,
who has also done some interesting analysis. He says that "China
has officially a GDP of $1.3 trillion and the US has a GDP of
$11.7 trillion. It doesn't reflect the reality. The Chinese GDP,
adjusted for the price difference between China and the US, is
probably already about 60% of the US economy, and the second
largest economy in the world."

Now, if the Chinese yuan would
be devalued by almost half, would the Chinese economy then be
equal to the American economy according to this analysis? Yes.
And if two economies are equal in size, which one gets to be
dominant?

Ugh.

***The Mogambo Sez: I am surprised at how gold is going down here lately. From the various
lease rates for gold, it looks like to me that that money
is being put into a calendar spread. Inescapable conclusion:
I have no idea what I am talking about. But if I did know what
I was talking about, I would say that this looks extremely, extremely
bullish for gold, and that the temporary fall in the
price of gold is a fabulous buying opportunity.

But it is more than that, as
Billy, one of the guys I play racquetball with and who likes
trying to make a little money by playing in some market or another,
or hatching some business deal, or exploiting some price discrepancy,
or some exploration or something, it's always something, but
never gold, is suddenly interested in gold. After all this time. He says he has heard some
good things about gold and is convinced enough to get some.
This is how manias begin, not how they end.

Richard Daughty
is general partner and C.O.O. for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
the better to heap disrespect on those who desperately deserve
it. The Mogambo Guru is quoted frequently in Barron's, The
Daily Reckoning
and other fine publications.